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In a typical multi-level marketing or network marketing arrangement, individuals associate with a parent company as an independent contractor and are compensated based on their sales of products or service, as well as the sales achieved by those they bring into the business.

In a legitimate MLM company, commissions are earned only on sales of the company's products. No money may be earned from recruiting alone ("sign-up fees"). Some less legitimate companies produce revenues primarily by attracting new participants or selling them marketing services, as opposed to selling actual products. One must analyze the compensation plan to determine whether participants are paid from actual sales to customers and not from new-recruit bonuses or business support sales.

Multi-level marketing has a recognized image problem due to the fact that it is often difficult to distinguish legitimate MLMs from illegal scams such as pyramid or Ponzi schemes. MLM businesses do operate legitimately in all 50 U.S. states and more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.

Amway in particular is a frequent target for critics for generating considerable revenues from selling instructional and motivational materials to its participants. The FTC filed a lawsuit against Amway in 1976. Amway's victory paved the way for companies to adopt a multi-level distribution system.

The 1980s saw a major shift as companies began managing the stocking and distribution of products as well as commission payments to their members. This allowed members to focus solely on marketing. Today, most MLM companies act as logistics companies that take orders, ship products and calculate and pay commissions.

With the arrival of the Internet, MLM companies have started to go online. Many established MLM companies began to use the Internet to promote their products. At the same time, many other new MLM companies started their businesses on the Internet which we call online MLM.

Companies have devised various MLM compensation plans over the decades.

Unilevel or Stairstep Breakaway plans are the oldest and most popular. They feature two types of distributors -- managers and non-managers -- and three types of pay:

Baseshop overrides are overrides of managers from their subordinate non-managers, collectively called a baseshop. This is the same as any other sales organisation.

Generational overrides are overrides of managers from the baseshop of managers who were previously their subordinate. Most plans compensate at least three generations of such managers.

Executive bonuses are commissions for managers who exceed a sales quota. For example, 2% of the total company sales revenue may go to a bonus pool that is shared monthly pro rata to managers who exceed $10,000 in that month.

Matrix Plans limit the width of each level in a distributor's group, forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them.

Binary plans limit the width of each level to two legs. Commissions are based on "cycles," where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches.

Elevator or Matrix schemes feature a game board or a list on which each distributor pays in one or more product units to participate. When a certain number of units have been paid in, the structure splits and the earlier participant receives consideration. The Matrix scheme article discusses the legality of this plan. You must do your own research as with any other investment.

Fraudulent MLM schemes can usually be identified by high entrance fees or requirements to purchase expensive inventories. They often collapse quickly when the merchandise cannot be resold, leaving all but those at the top of the pyramid with financial losses.

The Federal Trade Commission advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money. FTC trade regulation rules usually take 1-1/2 to 3 years before a final rule is established.

Amway has often been accused of being a cult. Informed observers have stated that Amway, the corporation which provides the products and runs the marketing organization is not a cult, but that the motivational organizations to which many distributors of Amway (and other MLM companies) belong can, and sometimes do, act like cults. Some motivational organizations apply enormous pressure to distributors to recruit new members, not associate with non-members, purchase "motivational material" at often inflated prices, and engage in other cult-like behavior.